Business Journal


Nigeria’s 2015 Appropriation Bill: Legislators Adopt the Ostrich Strategy

Ostrich strategy

A week after the House of Representatives passed the 2015 Budget, the Upper Chamber fulfilled its part of the Appropriation process by passing a N4.5tn budget. This is N134.4bn in excess of the N4.4tn submitted by the Executive arm late 2014.

Meanwhile, recurrent expenditure was reduced slightly by N0.5bn to N2.6tn while capital expenditure was scaled down by additional N85.9bn to N557.0bn from N642.8bn proposed by the Executive arm. Effectively, this implies that recurrent expenditure is approximately five times the capital expenditure.

A week after the House of Representatives passed the 2015 Budget, the Upper Chamber fulfilled its part of the Appropriation process by passing a N4.5tn budget. This is N134.4bn in excess of the N4.4tn submitted by the Executive arm late 2014.

Meanwhile, recurrent expenditure was reduced slightly by N0.5bn to N2.6tn while capital expenditure was scaled down by additional N85.9bn to N557.0bn from N642.8bn proposed by the Executive arm. Effectively, this implies that recurrent expenditure is approximately five times the capital expenditure.

Drafted on the assumption of US$53.0 oil benchmark, exchange rate of N190.00/US$1.00, 2.3m barrel per day crude oil production, 5.5% GDP growth rate and 1.1% Deficit to GDP ratio, we think the 2015 appropriation bill as passed by the National assembly seemed disconnected with present realities in the economy in a number of ways.

The most telling amongst the shortcomings of the budget includes the outright exclusion of fuel subsidy payment by both the Upper and Lower Chambers. Fuel scarcity appears to have remained a recurring subject across major cities of the Federation in recent time.

The oil marketers have blamed events in the currency market and most recently non-inclusion of subsidy payment in the 2015 budget as passed by the House of Representatives as reasons for cutting supply.

Nevertheless, we noted that the Minister of Finance has already made it clear that approximately N156.0bn will be paid to oil marketers today (April 30, 2015) to avert the crisis in the sector. On that note, we wonder how government intends to reconcile the exclusion of subsidy payment in the budget with the N156.0bn subsidy payment to be made to oil marketers.

That said, Recurrent Expenditure (N2.6tn) is also expected to be about five times the capital expenditure (N557.0bn) in the 2015 appropriation bill. Juxtaposing this with programmes and plans of the Buhari led in-coming administration which appears broadly expansionary, we wonder how appropriate the 2015 Appropriation Bill would be for the next government.

Ultimately, we think the realities on ground portray the 2015 budget as a “paper-tiger” that would be promptly reviewed by the next administration to become effectual.

Global Equities Market Review and Outlook
Global equities market performance under our coverage this week was broadly bearish as Q1:2015 economic data released in the US during the week shows slower GDP growth (+0.2%) relative to expectation (+1.0%).

Against this backdrop, the NASDAQ and S&P 500 Indices slumped 2.1%% and 0.8% W-o-W respectively. Similarly, the UK FTSE Index slipped 1.5% W-o-W as investors’ confidence on developed markets performance wanes.

In the Eurasian region, France CAC was down 2.8% W-o-W, Japanese NIKKEI slumped 2.5% W-o-W even as the German DAX fell 2.1% W-o-W. We believe this performance may not be unconnected with the US GDP data which moderated as harsh weather condition, mixed effect of cheaper oil and faltering global recovery weigh down on the world’s largest economy.

However, the Hong Kong HANGSENG sustained its positive outing, adding 0.3% W-o-W. Performances across the BRICS market were also largely bearish. The Brazilian IBOVESPA declined 1.8% W-o-W reversing last week’s gains, as the Indian SENSEX (-1.6 %) and the South African FTSE (-1.5%) both trended southwards.

On the other hand, the Chinese Shanghai Composite Index stayed bullish appreciating 1.1% W-o-W. Nonetheless, the Russian RTS closed flat as against prior week’s appreciation. Contrary to the rest of the world, major markets across Africa within our coverage advanced W-o-W as the Nigerian All Share Index improved 0.6% W-o-W on gains in bellwether stocks. The Kenya NSE 20 and the Ghana GSE advanced 0.6% W-o-W apiece.

However, Egypt EGX 30 dipped 0.7% to emerge the lone decliner.

Daily Equities Market Review and Outlook
The Nigerian Equities Market reversed a 4-day losing streak as the All Share Index (ASI) gained 1.9% to close the week at 34,708.11pts. Likewise, market capitalization improved N214.6bn to settle at N11.8bn. Today’s upsurge was largely driven by gains in DANGOTE CEMENT (+4.8%), NIGERIAN BREWERIES (+3.9%) and GUARANTY (+1.6%). Activity level measured by total volume and value traded improved as volume traded appreciated 30.1% (374.6m units) while value traded increased 18.1% to close at N3.8bn.

The NSE sector performance was mixed as the Consumer Goods Index led sector advancers with 2.0% as NIGERIAN BREWERIES (+3.7%) and
GUINNESS (+3.7%) rallied. Closely trailing was the Industrial Index, which appreciated 1.9% as sentiment on DANGOTE CEMENT(+4.8%)
strengthened on impressive Q1:2015 earnings numbers, even as the Banking Index rose 1.1%. Nevertheless, the Oil & Gas Index depreciated 1.6% due to price decline in FORTE OIL(-5.0%).

Similarly the Insurance Index dropped 1.1%. Market breadth as measured by the ratio of advancers to decliners improved (1.2x) today as 29 counters advanced in contrast to 24 decliners. Top on the gainers table today were PRESCO(+10.2%), FIDSON (+9.2%) and VITA FOAM (+7.6%) while the highest losing stocks werePAINT COM (-5.0%), FORTE OIL (-5.0%) and DANGOTE SUGAR (-5.0%). The equity market was awash with more Q1:2015 results today as listed companies rushed to meet the 1-month submission deadline for unaudited results.

Hence, we expect further investors’ reaction to these results in the coming week.

Weekly Equities Market Review and Outlook
The Nigerian Stock Market traded predominately in the red save for the last trading day this week erasing previous losses. The streams of positive quarterly results that were released gradually boosted investors’ sentiment most especially on Thursday(+1.9%). As a result, the NSEASI advanced 0.6% WTD settling at 34,708.11 points at the close of trade this week. Likewise MTD and YTD swung positive at 9.3% and 0.1% respectively. On the other hand, market activity was down W-o-W as the aggregate volume traded declined 43.4% W-o-W to 1.2bn units while aggregate value traded for the week shed 30.4% W-o-W to N12.0bn.

The Consumer Goods (+0.7%) and the Industrial Goods (+2.8%) sectors trended northwards respectively. On the contrary, the Banking, the Insurance and the Oil & Gas sectors all trended southwards, depreciating 1.7%, 2.3% and 6.9% in that order as sell pressure was sustained on key counters in the sectors during the week Market breadth was negative, settling at 0.8x as 36 stocks advanced while 41 stocks declined. 105 stocks however closed flat. PRESCO (+14.6%), NPF MICRO FINANCE (+13.8%) and AG LEVENTIS (+11.8%) were the best performing stocks for the week, while UNITY BANK(-22.2%), DANGOTE SUGAR (-13.8%), MAY & BAKER (-12.8%) and ACCESS (-11.1%) were the market laggards. We expect the market sentiments to improve in the week ahead as investors react to some impressive Q1:2015 results posted at the close of the week.

Money Market Review and Outlook
Liquidity within the market surged during the week hence average money market rates for the week dropped to 8.3% for the Open Buy Back rate (OBB) and 9.0%for the overnight rate relative to previous week’s 15.1% and 16.2% respectively. This was driven by bonds maturity worth N535.0bn which hit the system.

Liquidity level further increased on Tuesday with an opening balance of N812.2bn while Standing Lending Facility (SLF) accessed from the CBN by the Deposit Money Banks (DMBs) closed at N91.0bn. As such the OBB and Overnight rates declined marginally to 8.0% and 8.8% respectively.
On Wednesday however, liquidity opening balance declined to N712.7bn, pushing money market rates higher to 8.6% (OBB) and 9.3% (Overnight). This decline in liquidity was as a result of OMO auctions during the week (Monday and Wednesday worth N268.0bn and
N331.4bn apiece).

Amid net inflow of N93.4bn today from the OMO auction worth N258.0bn and OMO maturity of N351.4bn, the OBB and Overnight rates closed the week lower at 8.3% and 8.8% respectively. In the coming week, liquidity level is expected to increase slightly as T-bills worth N150.6bn and FAAC allocation for March are anticipated to hit the system.

Foreign Exchange Market Review and Outlook
Despite dollar auction sales worth US$91.2bn by international oil companies on Monday, the naira closed flat at N199.10/US$1.00 at the interbank market. This rate was maintained throughout the week. Similarly, the CBN’s clearing rate steadied at N197.00/US$1.00 for the week.
As a follow up to the CBN’s withdrawal limit on overseas card holders to US$50,000 (from US$150,000) per annum and daily cash withdrawals to US$300, the Apex bank has further clarified that customers’ cards linked to domiciliary accounts overseas are not affected. Although we suspect that demand for the dollar by travelers may increase locally as a result of this decision, we expect exchange rate to continue to trade within the current level at the interbank segment of the forex market in the coming week.

However, at the BDC segment of the forex market, the naira depreciated by N3.00 or 1.3% WTD to N220.10/US$1.00 from N223.10/
US$1.00 Bond Market Review and Outlook Against the backdrop of the bullish sentiment which drove a rally in the fixed income space last week, the market took a breather this week.

Hence average yield rose 17bps to 14.7%, even as investor sentiment varied along the term structure. Trading activities in the fixed income market however did not commence until Tuesday due to IT related malfunctions that prevented trading activities from taking place on Friday and Monday.

Activities however picked up strongly on Tuesday after the suspension on trading was lifted with volume and value of T-bills and bonds instruments traded reached a 6-day high. Investors played more at the short to medium end of the curve while the JUL-2034 and JUL-2030 instruments majorly drove volume in longer term instruments.

The shorter term instruments which experienced significantly rally last week witnessed correction this week as dealers quoted higher yields. This was traceable to profit-taking and the aggressive OMO mop-ups (N847.2bn in total) conducted by the CBN this week to rein in the liquidity influx on OMO bills (N366.0bn) and FGN bonds (N535.0bn) maturities.

OMO bills were allotted at relatively high yield of 14.0% for all tenors (vs 10.0%, 12.8% and 13.0% rates for the 91, 182 and 368 days tenor T-bills were allotted last week). This had a more telling impact on yields on shorter term debts, as all short term rates inched higher.

In contrast to the bearish activities at the shorter end of the curve, dealers quoted lower yields for long tenured securities with the NOV-2028, MAY-2029 and NOV-2029 instruments witnessing a W-o-W decline in yields.

Despite the mixed sentiment along term structure, the sovereign yield curve majorly maintained its normality. However, a slight inversion at the longer end of the curve remained noticeable where the 20Y benchmark instrument traded at a slight discount to the 15 year benchmark bonds.
We expect bargain hunting to take precedence in the FGN bonds market next week, especially across the short to mid-termed tenors. Liquidity in the money market is expected to improve on the back of liquidity injection from FAAC allocation and settlement of maturing treasury bills (N153.6bn).

Our short to mid-term outlook for the market remains moderately bullish as we expect investors to further re-price financial assets based on lower political risk and the recent stability in the forex market.

Source: Afrinvest Research

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